Being a collection of thoughts, observations, comments, opinions and views on investing--especially for the long term.
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Tuesday, May 24, 2005

A Tree with Negative Time Value

We have a beautiful fir tree in our front yard that provides shelter for birds in spring, shade for us during summer and pleasant greenery for the neighborhood year-round. It towers 60 feet above the ground and approaches almost two feet in diameter at its trunk. The value of the tree lies in the way that it adds a welcome bit of nature to our predominantly concrete and asphalt urban landscape.

However beautiful the tree is, it bears one fundamental flaw--it sits too close to our house, just six feet from the corner of our garage, where the main water line and gas line come in. Two big roots, one the size of my arm, the other the size of my leg, run alongside the concrete foundation footing, precariously close to the water and gas lines. To date, our utilities have not been disrupted, but it would not be surprising if one of the roots were to break a pipe this year or next, or the foundation were to crack the following year. The tree also sheds acidic needles onto our roof, causing premature deterioration of the roofing shingles, and fills our rain gutters with debris, leading to increased maintenance costs.

The cost of removing the tree today is $500. If we choose to do nothing and simply wait, we run the risk of a pipe breakage or, even worse, a cracked foundation, that would cost many thousands of dollars to repair. Since the tree is healthy and growing with ever-expanding limbs and roots, the likelihood that it damages our house only increases over time. Further, as the years pass, the cost of professional removal of the tree increases as well.

Investments--stocks, bonds, real estate, precious metals, even trees being grown for their timber--tend to increase in value over time, exhibiting positive time value. Our fir tree, on the other hand, behaves differently from a financial perspective: Its expected cost (not value) to us increases over time, having a financial impact similar to a capital asset like a car. The utility that a car provides as a means of transportation compensates for its depreciating value and maintenance costs, but there eventually comes a point when the car's reliability diminishes and/or the cost of maintaining it becomes too burdensome. In the case of our fir tree, we are arguably (i.e., some neighbors and arborists would disagree) at or close to the point where its beautifying value no longer is large enough to offset its expected cost to us, and the tree begins to take on what I would call "negative time value," i.e., the longer we wait, the higher our expected net cost (beautifying value minus expected cost of damage and removal).

The wise long-term asset management decision in this case is to pay the $500 for tree removal today, rather than wait and suffer from higher anticipated costs in the future. Just as a trader learns to cut his losses early on when a market begins to go against him, it would be prudent for us to cut down this tree now before it causes thousands of dollars of damage. If only the developer 26 years ago had planted the tree further away from the house, we would be able to continue to enjoy the tree indefinitely without exposing ourselves to the risk of a cracked foundation and disrupted utility lines. . . . But, hey, developers are often just as short-sighted as investors are.

By "negative time value," I mean value that erodes rather than grows over time. But, value and cost are opposites; so, negative time value can also be driven by increasing costs. For clarity, I rephrase: As net cost (cost minus value) increases, net value (value minus cost) decreases.